Pensions governance: New names for managed funds

If you read nothing else, read this…

• The Association of British Insurers has changed the names of its managed fund sectors so pension scheme members will better understand the levels of risk associated with their fund choices.

• Clear descriptions of fund choices will become even more important when employers are required to auto-enrol
employees into a workplace pension from October 2012.

Case study: Institute of Civil Engineers has a wealth of information on group personal pension

When the Institute of Civil Engineers (ICE) introduced a group personal pension (GPP) plan from Scottish Widows in 2010, it gave employees extensive information on their investment choices because it had decided not to offer a default fund.

Working in conjunction with Secondsight, the organisation provided its staff with a simply worded and clear information pack detailing investment options, as well as sessions with an independent financial adviser.

Group presentations also included information on investment and employees’ attitudes to risk. Ethan Kelly-Wilson, head of HR operations at ICE, says: “We wanted the best to come from the advice sessions so people felt they had been advised properly and could make their own decisions.

“Having a default fund seems to defeat the object. It is a waste of our investment and employees’ money and time if they go through a meeting with an adviser and then end up in a default fund.

“Employees were given questionnaires to complete so they could work out their own attitude to risk before the meeting. They could then say ‘ I know what my attitude to risk is and what kind of investments I am looking for’.”

The GPP’s investment funds are labelled according to the degree of risk they present to the member. These include moderately adventurous and cautious funds.

Insurers are changing the names of their managed fund sectors, but will the new descriptions leave pension plan members any the wiser? Nick Martindale reports

The Association of British Insurers (ABI) announced in February that, after consumer research, it is changing the
names of its managed fund sectors. This has reignited the debate over how much employers and pension fund providers should try to convey levels of risk within investments to individual pension scheme members. The
ABI’s move followed the Nest Corporation’s publication, earlier this year, of a phrasebook aimed at simplifying the terminology used around pensions.

The ABI has also called on its members to review the names of their own funds, urging them to replace subjective terms such as cautious, balanced and flexible with more descriptive labels based on the percentage of funds invested in shares (see box right).

James King, interim assistant director at the ABI, says: “A lot of consumers read into those labels certain assumptions about the level of risk that comes with the funds and they did not always match up with the reality of what the funds were actually doing.

“We explored alternative names through focus groups and the message that came back was to avoid jargon and set out how much money was invested in shares.”

However, the implications of this go beyond the scheme providers themselves and affect HR and benefits professionals, and lay trustees. This is likely to become even more of an issue once employers are obliged to
automatically enrol staff into a workplace pension from 2012, which could add as many as eight million people to those already saving in workplace pension schemes.

Misguided expectations

This is also an issue if members opt to self-select their funds, because there lies the greatest potential for misguided expectations. David McCourt, senior policy adviser at the National Association of Pensions Funds (NAPF), says: “More specific terminology like that proposed by the ABI is a start. There are more types of fund and general platforms that can be accessed now and it is important that descriptors, which were fairly common and generic a while back, are now made much clearer in saying exactly what they are.”

But when it comes to renaming investment funds, the terms ‘multi-asset’ or ‘mixed asset’ may be preferable to ‘mixed investment’, says Ian Pascal, marketing director at Baring Asset Management. However, he believes renaming funds to make them more self-explanatory is a positive step.

“The old managed sector names were confusing, irrespective of your level of sophistication,” he says. “When you are getting down to individual scheme members with something sitting in the cautious or defensive sector, I would be surprised if they did not take those words to mean cautious or defensive. I do not think it is a big issue for professional trustees, but it would be an improvement if it was clearer.”

However, when renaming funds, employers must consider whether employees will clearly understand the new terms. For example, Steve Bowles, head of defined contribution (DC) at Schroders, says: “Most members do not understand what a share is, so to say a fund has 10-40% shares is going to be relatively meaningless.”

Jesal Mistry, DC consultant at Aon Hewitt, adds: “The names tell members there are a number of asset classes in the fund and the proportion of equity, but nothing more. They are probably more compliant but are no more useful for investors in telling them the nature of the funds included within them.”

So it is a matter of debate which elements of risk should be highlighted. Specifying equity allocation may be too simplistic, says Alex Thurley-Ratcliff, head of multimedia at Shilling Communication. “We need to explain more than capital risk,” he says. “What about inflation risk? Is there not a problem in the case of a risk-averse individual choosing to invest in cash or bonds at age 25, when clearly exposure to equities would be mitigated by the long-term nature of their retirement investment? What about other asset classes and different equity types?”

Wider issue of communication

For many, tinkering with labels is just part of a wider issue around how the various options and strategies are communicated. Baring Asset Management’s Pascal says: “The general trend is more towards putting the ultimate decision on where to put pension assets to the individual member, which means everything needs to be very clear about what sort of product it is and where it sits. That is a lot more than a name – it is about how you present the product to potential investors.”

Unless there is a human element to investment information, many people will find it hard to make a choice, says Thurley- Ratcliff. “Trustees do not typically voice concern over fund names, but are concerned over investment understanding and the complexity of offering too many choices.”†

It is unclear whether individual fund providers will review the names of their own products, potentially adding more labels to what is already a bewildering array. Schroder’s Bowles says: “This is more a reflection on where consumers are going and the level of information they require rather than anything inherently wrong with the funds. But given these issues have come to light, the onus is on the industry to create clearer labelling.”

But others are less enthusiastic about the potential to deliver long-term improvement. Richard Butcher, managing director of Pitmans Trustees, says: “Providers tend to follow the route of least resistance. If that is what the ABI is shouting for and that becomes regulated in due course, then scheme providers will do it.

“But it is just tinkering around the edges. The main issue is how to fix DC [pensions] and the fact that it does not deliver what it is expected to. Playing around with the fund names does not fix that.”

What’s in a name?

The Association of British Insurers has changed the names of its managed funds sectors as follows:

Old names:
Defensive (up to 35% equity) managed
Cautious (up to 60% equity) managed
Balanced (up to 85% equity) managed
Flexible (up to 100% equity) managed

New names:
Mixed investment 0-35% shares
Mixed investment 20-60% shares
Mixed investment 40-85% shares
Mixed investment 60-100% shares

The move follows extensive consumer research, which revealed that:

• The perception of risk was a key factor in decisions about investing and fund choice.

• Respondents wanted to draw some conclusion about a fund’s level of risk from its name and were inclined to make assumptions if the name did not give clear information.

• The old names were familiar to many and assumed to be useful and appropriate to the type of investment they
seemed to describe.

• Once respondents understood how mixed-asset sectors work, most concluded that the previous names lacked clarity and were a source of potential misunderstanding.

• There was a strong preference for everyday terminology, with investment preferred to asset, and shares preferred to equities. Source: ABI 2011

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